“Fifteen years ago, this was a fishing village.”
That’s a statement you hear often enough in China these days. In Ningbo city in eastern China, Wang Dexian, vice-director of the Ningbo Economic & Technical Development Zone, talks of how things have progressed in just a few years. He wants a different sort of fish to bite. His passage up the ranks to the centre of power in Beijing depends on how much foreign direct investment (FDI) he manages to attract. So he is forever in hard-sell mode.
A two-hour flight away, Ma Wei, who is attached to the Yingkou Economic & Technological Development Zone, also in eastern China, has a similar story. “Thirteen years ago, this was a fishing village,” she says. “Today, more than 28 countries have invested here.”
One of them is an Indian company — Orind Refractories Ltd. — which set up shop more than 10 years ago and makes refractory products that are used in the furnaces of, say, steel mills. “When we first decided to go to China, people thought we were mad,” says Orind chairman Ravin Jhunjhunwala, who heads the $80 million group. Now, a decade later, the largest refractory company in India – Tata Refractories – is following him. The Tatas have just acquired land in Liaoning province, where Yingkou and Orind are situated. Orind has, meanwhile, emerged as China’s largest exporter of refractory products.
The Orind story is one example of the success of Indian companies in China. It is the result of a carefully crafted strategy. The decision wasn’t made overnight; Jhunjhunwala and group managing director Rajeshwar Mishra first visited China in 1988. They finally took the plunge in 1995.
Orind was originally envisaged as a joint venture (JV). Most Indian companies take the same route. The reason: Getting into a new geography, about which very little is known requires a helping hand. This is true of even the western and South Asian MNCs. Unilever, the Anglo-Dutch multinational that offers, among other items, food and personal care products, has partnered with several Chinese companies, for example.
Western MNCs, however, have totally different strategies than Indian companies. The basic difference is that most MNCs are looking at the Chinese domestic market. Indian companies, on the other hand, are more into sourcing from China, either to supplement their globalisation efforts or to feed the Indian market.
Limited Budgets
There is also the question of resources. MNCs are characterized by deep pockets and a tendency to tackle problems by throwing money at them. “MNCs have money,” says Hugh Peyman, founder and president of the Shanghai-based Research-Works, a research company that specializes in longer-term thinking on Asia. “Indian companies have strategies.”
Not that large investments are bad in themselves. For example, they shut out competition. The only challenger to a Unilever, which has pumped in over $1 billion into China, could be a Procter & Gamble (P&G), which started in China as a JV in Guangzhou in 1988. Today, it has several wholly-owned companies and JVs.
Other MNCs are busy as well. Coca-Cola has made cumulative investments of $1.2 billion in China since 1979 and says there is more money left in its war chest. Pepsico’s investments have also crossed $1 billion and the company announced early 2006 that it had earmarked another $850 million over the next two to three years.
Compare these figures with what Indian companies are putting in and the difference becomes obvious. The biggest investment in China by an Indian company is probably the $75 million by drug manufacturer Aurobindo Pharma. This too was in phases; the initial outlay was just $5 million. Orind spent $5 million in 1995. And Tata Refractories is spending $6 million today to put up a plant in the same province.
Big Ambitions
But these small players have big ambitions. “Indians understand the China market better than the MNCs,” says Adi Godrej, chairman of the Mumbai-based $1.3 billion Godrej Group, which has interests in personal care products, amongst others. Godrej recently took his entire 16-person senior management team on a China safari to identify JV partners and takeover targets. “The Indian market has a lot of similarities with the Chinese market,” he says.
One thing the Indians do know is that with their limited resources, they need to join hand with local partners, especially companies that are trying to sell domestically. In the pharma area, most Indian companies have accepted this approach. The Delhi-based $1.17 billion pharma company Ranbaxy, for example, set up the first ever Sino-India JV; Ranbaxy Guangzhou China Ltd. (RGCL), located in Guangzhou, a stone’s throw from Hong Kong, was incorporated in 1993. The partners are Ranbaxy Laboratories, Guangzhou Qiaoguang Pharmaceutical (an affiliate of Bai Yun Shan Pharmaceutical) and New Chemic (a Hong Kong-based group with offices in the U.S. and Japan). The total investment was around $17 million.
The focus of this company is principally on the domestic market. Country manager Nevin Bradford admits that there is no way he can compete with the MNC money muscle; the big players have up to 1,500 sales reps. Instead, he has tied up with several companies in the provinces to push sales. It works because China is a hospital market. Individuals don’t buy drugs (except in cities like Shanghai where healthcare is moving into the private sector domain). Hospitals supply the medicines, so medical reps have sharply-targeted customers. Chinese selling to Chinese works better. Ranbaxy Guangzhou does export some of its products — mainly to Latin America. But it’s just by way of keeping its hand in that aspect of the business.
Another Indian pharma company – the Hyderabad-based $446 million Dr Reddy’s Laboratories — has a JV with the Rotam Group of Canada and Kunshan Double Crane Pharmaceutical of China. A more recent entrant is the Chennai (south India)-based $191 million Orchid Chemicals & Pharmaceuticals, which has formed a 50/50 joint venture with the North China Pharmaceutical Group.
One exception is the $250 million Aurobindo Pharma. Aurobindo Tongling (Datong) Pharmaceutical started life as a 50:50 JV with Shanxi Tongling Pharmaceuticals. Later, Aurobindo bought out its partner. But Aurobindo ships 70% of its output back home to Hyderabad and the rest to its wholly-owned subsidiary Aurobindo (Datong) Bio-Pharma. It can afford to be different.
Like the pharma companies, Orind Refractories is looking at the domestic market now. And, inevitably, it is seeking local partners. This strategy may actually have been forced upon it because of circumstances, including an accusation of dumping by the European Union. Though the problem has been sorted out, production was affected. Orind has now tied up with 10 local companies to source refractory products. These will be added to its export basket. If things go wrong any time, this pipeline will be turned off and Orind’s own plant can keep humming. The 10 local companies, meanwhile, are being used to hawk Orind’s products in the Chinese market.
There are, of course, exceptions to every rule. The Mumbai-based Larsen & Toubro (L&T) is setting up a $11 million plant in Wuxi to make high-end air circuit breakers. The $5 billion L&T is a technology-driven engineering and construction organization, one of the largest companies in India’s private sector. It has additional interests in manufacturing, services and information technology. L&T has no JV partner in China (though it did consider this route), and it is marketing entirely to Chinese customers. Mahesh J. Paleja, chief executive of L&T (Wuxi) Electric Company, sees no problem. L&T has been supplying customers in China from its factories in India. The China plant will make it logistically easier and cheaper to cater to them. L&T is actually selling to large Chinese companies, which market these circuit breakers under their own brand names.
The Wuxi plant is only the first step. L&T chairman A.M. Naik has major globalisation plans. And he sees many more units coming up in China in L&T’s diverse range of activities. Adds Paleja: “You can’t be a global company without being in China.”
Accidental Entry
Another company catering to the domestic market without the benefit of a JV is Berger Paints (Ningbo), a subsidiary of India’s largest paints company, the $680 million Mumbai-based Asian Paints. But Berger wasn’t part of any deliberate strategy; it fell into Asian Paints’ lap because of a takeover of Berger Paints International.
The China unit was at that time lying closed. Asian Paints decided to revive it. The problem, of course, is that it had to sell in the domestic market. You can’t export paints; the transport costs are too high. Though there are not too many pan-China paint companies, there are more than 8,000 small players. Today, Asian Paints is hanging on. But, Jagdish Acharya, regional vice-president (China, South Pacific and Australia) of Berger Paints, says the jury is out. The Asian Paints brass in Mumbai will soon take a decision on whether to continue with the unit or not.
The decision, Acharya admits, will not be on purely economic grounds. “There are other reasons for being in China,” he says. Like everybody else, he echoes the line that you cannot be a global player without one leg in China.
Why didn’t Berger set up a JV and allow its partner to handle the marketing? It did, and that’s where all the problems started. Before Asian Paints came on the scene, the Berger unit was a JV with the local Ningbo Paints. It closed down because the two partners could not see eye to eye. “You can’t always work with them. And if you try to buy them out, they ask for too much,” says Acharya.
The WOFE option
“The recommended route for Indian companies is a WOFE (wholly-owned foreign enterprise),” says Orind’s Mishra. It’s not just India. Surveys show that WOFEs overtook JVs as the primary form of foreign investment in China in 1999-2000. The trend has continued.
Like Asian Paints, some other Indian companies have entered China though a process that is partly serendipitous. The Mumbai-based Essel group (which also has interests in media — Zee — and entertainment – Esselworld) set up a wholly-owned subsidiary in Guangzhou in 1997. In 2002, it took over the laminated tubes business of Propack of Switzerland. The latter had operations in China too. The combined Essel Propack now holds 30% plus of the world market and more than 70% in China. Similarly, the $2.5 billion Mumbai-based Videocon group acquired two plants at Dongguan and Foshan in China, when it took over French giant Thomson SA’s global colour tube manufacturing business. (Videocon has a major presence in consumer durables and oil & gas.)
The need to take different routes is best illustrated by the example of India’s largest software and services company, the Mumbai-based $2.9 billion Tata Consultancy Services (TCS). Tata Information Technology (Shanghai) Company is a WOFE. It services global clients. For the domestic market, TCS has set up a JV with Microsoft and three government-owned firms. TCS will hold a 65% stake and lead the show. “It is an indication that, in IT (information technology) at least, India has arrived,” says V. Rajanna, former country head for TCS in China. Rajanna is now headed for a pan-Asia role at TCS.
“That may be true of IT,” says S.S. Naik, the chief representative of the Mumbai-based $22.6 billion Reliance Industries in China. “But in other sectors, there is still a long way to go. One advantage is that most Indian companies seem to know what they are doing. At least, they are taking the trouble to first find out.”
A Strategic Blueprint
At a gathering of an informal Indian Institute of Management (IIM) alumni association in Shanghai (there are 30-40 IIM grads in China), the assembled brain trust gives a back-of-the-envelope strategic outline:
Look before you leap. Most Indian companies start with rep offices. Banks (there are more than half-a-dozen Indian banks in China) have to function as rep offices for two years before they can get a banking licence. Use this period to learn about the market.
Invest small. You can’t match the Western MNCs, so don’t try to. Instead, find niches.
Look first at catering to the global markets and demand back home in India. You know these markets; you know the competition. Use China as a cheap production base.
The JV route is recommended for those eyeing the Chinese market. But, be warned, it comes with several problems.
Be prepared to lose money.
The last point is very important. Several MNCs don’t make money. It will take decades to get returns on their large investments. Are Indian companies in the same boat?
The picture is unclear. Orind is making money. Ranbaxy makes money some years, not in others. It depends on the prices of the drugs fixed by the government. Dr Reddy’s started in 2000. It is just about breaking even. Says Naik of Reliance: “It takes at least five years to make profits.”
So will Indian companies succeed in their China mission? They are cutting their coat according to their cloth and not paying a king’s ransom as tailoring charges either. They will still be around when half the MNCs retire after their China misadventures. Confucius say: “He who will not economise will have to agonise.”
